The problem of plenty

A buoyant market and large inflows into funds have led mutual funds to deliver hefty gains in the recent rally. But the euphoria comes with its own sets of problems. Managing copious inflows into funds amidst sky-rocketing valuations is not easy.

While the overall assets of equity diversified funds have gone up 48 per cent to around ₹4 lakh crore, there have been funds that multiplied their corpus manifold in the last 18 months — L&T India Value Fund (rose by 302 per cent to ₹4,235 crore), Birla Sun Life Advantage Fund (by 245 per cent to ₹3,549 crore), SBI Magnum Multicap Fund (by 238 per cent to ₹2,309 crore) and DSP BR Opportunities Fund (by 223 per cent to ₹2,601 crore).

One of the strategies that funds adopt to mitigate the risk in overheated markets is to hold a portion of the inflows in cash. This can help contain the downside if the market turns volatile and also help funds take advantage of attractive buying opportunities if they arise later.

Many funds, over the past year or so, have increased their cash holdings. For instance, Edelweiss Large Cap Advantage Fund (from 2 to 25 per cent), Birla SL Small & Midcap Fund (from 6 to 20 per cent), Quantum LT Equity Fund (from 5 to 14 per cent) and L&T Emerging Businesses Fund (from 5 to 13 per cent) have upped their cash levels substantially between March 2016 and May 2017 (latest data available).

But while this strategy will help the fund manager contain losses better when the market corrects, it could backfire if the market continues to rally.

Funds also need to have specific mandates that allow them to retain higher cash positions. To address this, many equity diversified funds have simply bought more stocks and owned a more diversified portfolio, without upping their cash holdings.

DSPBR Opportunities Fund (from 44 to 69 stocks), DSPBR Micro-Cap Fund (from 59 to 82 stocks), DHFL Pramerica LT Equity Fund (from 42 to 67 stocks), Baroda Pioneer Mid-cap Fund (from 22 to 38 stocks) and Principal Emerging Bluechip Fund (from 62 to 77 stocks) have added more stocks to their portfolios in the recent rally. While diversification reduces the downside, a broad-based correction in the markets will still impact such funds.

Some equity funds stopped accepting fresh lumpsum subscriptions and SIPs too as they found it difficult to deploy the large inflows into available opportunities in the market. For instance, SBI Small and Mid-cap fund, DSP BR Micro Cap fund and Mirae Asset Emerging Bluechip Fund are some funds that have either capped lumpsum or new SIP investments.

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